Winners and Losers in Asia: Implications for Growth and International Trade

Winners and Losers in Asia: Implications for Growth and International Trade

Stewart Rickert

The prolonged fall in oil prices has had broad and far-reaching implications for Asian countries across economic, financial, and political lines. As such, this paper will be concerned solely with the macro-economic implications of this fall in oil prices; specifically, the focus will be on consequences for growth and international trade. However, before the consequences of the falling oil price can be discussed, it is essential to establish the context for the its fall. The fundamental assumption of this paper is that the falling oil price has been primarily caused by an increased supply in crude oil. Rising supply has been caused by in part by improving production in the United States, but mainly, it is a result of Saudi Arabia’s refusal to curb production despite the declining price. As a result, the market has been effectively flooded. While the argument has been made that the falling oil price is merely a symptom of low demand, a post-recession hangover, falling demand has played an exacerbating role. The core driver has been improving supply. When considering the effect of falling oil prices on different Asian countries, each country will be placed in one of four groups, based on her net energy imports and value added from services. Net energy imports is used to determine whether or not the country is an energy exporter, and value added from services is used to represent the distribution of the labor force and as a gauge of national wealth. As a country becomes wealthier, the percent employed in manufacturing and agriculture declines, and the percent employed in services rises. It is important to note that this analysis is aimed at gauging the wealth of the average person in a county. For this reason, some countries with a high-level of national wealth are actually rated fairly low. China, for instance, is actually scored in the bottom half of the wealth distribution. As such, the four groups are as follows: exporting and high-income, exporting and low-income, importing and high-income, and importing and low-income (table 1). Furthermore, this paper will focused on the medium term effects of the fall in oil prices. Here, the medium-term is defined as when both consumers and firms see falling overall prices from oil prices. In the short-term, poor countries benefit from cheaper manufacturing and relatively more competitive exports, but rich countries still feel a stimulatory effect of rising consumer wealth, both internationally and domestically.

Falling oil prices work their way through the economy starting at the firm level. As the input cost of oil falls, manufactures are cheaper to produce. A core assumption of this paper is that the decreasing cost to produce manufactures is then passed on to consumers through lower prices. If this is the case, poor countries benefit on a domestic and an international level. Firstly, consumers see lower prices. Since the real wage is determined by the nominal wage divided by inflation, this disinflationary experience has the same effect as increasing the real wage. As a consequence of an improving real wage, wealth will improve. In turn, this will improve aggregate demand. However, wealth does not improve across the board. In exporting countries, firms producing oil will feel a serious hit. Importantly, though, since the people controlling the oil are already wealthy, their falling wealth does not affect aggregate demand. Their marginal propensity to spend, already low, remains unchanged. In essence, falling oil prices plays the role of wealth distribution. In doing so, it distributes wealth from the top-end, where the marginal propensity to spend is low, to the bottom end, where the marginal propensity to spend is high. Secondly, since goods are cheaper to produce, economies reliant on manufacturing benefit relative to economies reliant on services. As such, poor economies benefit relative to the wealthier counterparts. As a consequence of this, the exchange rate of poor countries falls relative to wealthy countries. In turn, goods are made more competitive. The only concern poor countries have concerns its citizen’s marginal propensity to import. As they become wealthier, they begin to import more. In turn, this can exacerbate balance of payments concerns. In contrast, wealthy countries only see the consumer effects of falling oil prices. Aggregate demand is still improved as a consequence of rising wealth, but the firm side remains unchanged. Since these economies are relatively service dependent, firms do not enjoy any benefit from lower oil prices. In fact, as a consequence of relatively lower prices in poorer countries, wealthy countries may actually suffer from an inflated exchange rate. In turn, this will reduce their competitiveness.

In term of net exporters or importers, the logic is quite straight forward. Net exporters suffer from a falling oil price as they see falling revenue. In turn, this can exacerbate current account deficits. However, since the profits from oil revenue goes to a small group of people, this does not have particularly deleterious effects on their macro economy. However, as the average consumer’s wealth improves, so does their marginal propensity to import. Therefore, many of these economies may see an even worsening balance of payments. In contrast, importing countries gain from a falling oil price unambiguously. Both consumers and firms see lower prices, and their current accounts actually improve. As such, the group of Asian countries that benefits the most from a fall in the oil price are importing and low-income countries outlined below. The group of Asian countries that loses are the exporting and high-income countries. Exporting and low-income countries will suffer if they are unable to reconcile balance of payments concerns. Both Saudi Arabia and Qatar are clear examples of countries with current account deficits substantial enough that growth may have to be curbed. The importing and high-income countries benefit as well but not as much as their low-income counterparts.